Something magical happened when Macron won the French election. Populism has faded, the euro or rather the longevity of the euro is no longer being questioned and investors are finding comfort by investing in Europe. Europe is no longer a place that investors fear, it is now a place where investors go to make a euro!
The U.S. equity market appears to be losing its appeal. With the Vixx at an all-time low or close enough equity markets in the U.S. should be running hot. Bonds should be considerably higher yet both are not and this is exactly the conundrum that investors are trying to work out. For U.S. centric investment firms the task is difficult given there are strong headwinds as business realigns capex for increased dividends and share buybacks. The lack of capex can only last for so long and falling productivity suggests that whilst the economy is at full employment this state can rapidly change.
The Republicans went into a huddle today to try and sort out Trump Care, the Bill that is going to replace Obama Care. The all-male, all white group of senators will discuss what they believe will be palatable for their various electorates. It is expected that it could take some time before any consensus can be reached. This once again highlights the problems and the problem of expectations, Trump’s team simply cannot put up a Bill and expect a rapid transition. The other problem for the Republicans is that with a half senate election looming in the near future, Trump’s appeal is also starting to be questioned as Trump tries to pivot to the centre. He has softened his stance on NAFTA, he no longer says that he would call China a currency manipulator and he no longer has his anti -Muslim ban on his electoral website, this may well infuriate or alienate his previously passionate supporter base. Questions are also being raised by the Republicans themselves over Trump’s involvement with Russian interests. Lindsay Graham has stated he wants to see evidence of suggesting no involvement. To that end, Trump has offered to have a certified letter sent by his lawyers however that may well just be a play on definitions. Watch the space as it could get interesting.
The markets were quiet. The Stoxx saw the greatest gains on the day up 0.5% as investors started to weigh into the European equity markets. Fed officials remain hawkish and that was the reason behind the strength of the dollar. The Bloomberg Dollar Spot Index was up 0.5%. The euro was weaker as traders took profits.
Commodities were down Gold fell to its lowest level in two months, falling 0.9% to close at 1,216.10. WTI slipped below $46.00 a barrel on the weight of increased Libyan output to close at $45.88. Zinc and nickel rose.
U.S. equities were slightly weaker on the day although the NASDAQ hit a record high. The Main Board was down about 0.1%. The Vixx was slightly higher on the day after seeing Mondays close as the lowest since December 1993 (reported by Bloomberg).
Bonds had all the reasons to be weaker on the day but any real selling failed to eventuate. With hawkish comments from Fed officials, expectations are that the Fed will hike in June. Bonds simply watched and with further refunding due this week it looks as though investors are somewhat comfortable or complacent about the current level of bond rates. The U.S. 10 year closed at 2.40%, the yield curve remained steady with a slight flattening of the curve. The curve at present is 2/10 at 105.10, the 10/30 at 62.70 in 0.6bp and the 2/30 168 closing in about 0.8bp. French 10 year OAT’s rose 2 bp to close at 0.86% and the 10 year bund rose slightly to close at 0.43%.
Aussie Market Today.
The Aussie market today will react according to how believable the Australian Treasury projections are. The Budget will have an impact on today’s equity markets with Banks likely to take a hit following an unexpected impost levied on them by the LNP. The infrastructure planning looks interesting but it will be implementation that is important, especially given the problems the Labour Government faced with corruption when the then Labour Government introduced policies to build roads and school halls to aid the economy in 2008/09. Expect wastage and the degree of wastage will determine the success or otherwise of Morrison’s Policy.
The bond market should be a little weaker as there is quite a task ahead in raising money to fund the infrastructure projects of some $75 billion. The reaction will be interesting as this will clearly require tradeoffs.
The currency is weak and should remain this way for a little while longer. With the recent RBA comments bordering on dovish intent and the U.S. counterparts being quite hawkish and commodities weakening as China appears to be weakening then it is hard to see the Aussie Dollar strengthening in the near term.